Can a seller keep a buyer’s deposit if a real estate transaction does not close?
Q: I am selling my house, but the transaction did not close. Am I entitled to the buyer’s deposit?
A buyer of real estate in Ontario will usually need to provide the seller with a monetary deposit when they submit an offer to purchase.
If the offer is accepted and an agreement of purchase and sale is entered into, the monetary deposit is usually held by the realtor in the brokerage’s trust account for either the buyer or the seller.
If a transaction fails to close as a result of something the buyer did or did not do, it is a common misconception that the deposit will be automatically forfeited to the seller. Sometimes transactions do not close simply because the lender fails to forward mortgage funds to the buyer in time.
In Ontario, a realtor will hold a monetary deposit in their brokerage’s trust account, which is a bank account that holds funds for the benefit of another person. It is not held by the realtor personally, and a realtor cannot simply make a decision to release a deposit even if it is factually clear that the deposit should be released to the seller.
A realtor is bound by the agreement of purchase and sale, or any other subsequent agreement entered into by the buyer and the seller.
A deposit can be released by a realtor in 3 circumstances
The first is when the transaction, as described in the agreement of purchase of sale, is completed and the house is sold to the buyer.
The second is where the buyer and seller mutually agree to release the deposit by executing a second agreement, called a mutual release, which is usually entered into after a transaction fails to close and cannot be revived.
The third is where a court order mandates a deposit be released.
In the situation contemplated here, it was the result of the actions or omissions of the buyer that resulted in the transaction not closing. If the buyer is also unwilling to consent to the second circumstance, being the execution of a mutual release for the release of the deposit, a seller would be forced to seek a court order for the release of the deposit. Often, the legal fees associated with seeking a court order are more than the amount being held in trust as a deposit.
As a seller, what can I do to protect myself?
In short, you should ensure that any offer to purchase your home includes the provision of a sizeable deposit relative to the purchase price. With a sizeable deposit, you create a deterrence to buyers to simply walk away from a transaction they agreed to complete.
Additionally, you encourage the buyer to remain engaged in the transaction which can help revive the transaction itself, or lead to the execution of a mutual release of the deposit.
Lastly, you can include a clause in the agreement of purchase and sale mandating that the deposit be released to the seller if the transaction fails to close on the closing date as a direct result of the buyers actions or omissions. However, this clause may still be contested by the buyer and is not perfect.
The real estate lawyers at Ross & McBride are well versed in all aspects of a real estate deal, from the negotiation of an offer to purchase a home, to identifying and rectifying issues throughout the timeline of a transaction, to the negotiations of a mutual release of a deposit after a failed transaction.
This article was originally published by The Hamilton Spectator.
